Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Friday, 19 August 2016

Why not merge monetary and fiscal policy?

John Williams of the San Francisco Fed published an article recently advocating a bigger role for fiscal policy.

One relevant passage reads:

"Turning to policies that can help stabilize the economy during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to recessions, working hand-in-hand with monetary policy. Instead, it has too often been stuck in a stop-and-go cycle, at times complementing monetary policy, at times working against it. This is not unique to the United States; Japan, and Europe have also fallen victim to fiscal consolidation in the midst of an economic downturn or incomplete recovery.

One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries (Williams 2009, Elmendorf 2011, 2016). These already exist in the form of programs such as unemployment insurance but are limited in size and scope. Some possible ideas for the United States include Social Security and income tax rates that move up or down in relation to the national unemployment rate, or federal grants to states that operate in the same way. Such approaches could be designed to be revenue-neutral over the business cycle; they also could avoid past debates over fiscal stimulus by separating decisions on countercyclical policy from longer-run decisions about the appropriate role of the government and tax system. Indeed, economists across the political spectrum have championed these ideas."

Well quite. In fact why not take it a stage further and simply fund fiscal deficits via new money? I.e. for each dollar of fiscal stimulus, there’d be an extra dollar of base money in the hands of the private sector (which is monetary stimulus of a sort). And that’s what’s advocated by Positive Money, the New Economics Foundation and Richard Werner.

But instead of the latter monetary policy in the form of adjusting the private sector’s stock of base money, Williams seems wedded to adjusting interest rates. Well the problem with that is that is first that there’s a wealth of evidence that interest rate adjustments don’t actually have much effect. Second, the lag between interest rate changes and actual changes in investment spending are long. Third, the GDP maximising rate of interest is presumably the free market rate. That is, ARTIFICIAL adjustments to interest rates are not on the face of it a GDP maximising way of attaining full employment.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

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Nice picture.

For source, Google: TREASURY: LA LEGGENDA DEI BOND VIGILANTES!

Bits and bobs.

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I do like Stephanie Kelton’s MMT colouring book. Filling in the colours should be a compulsory for all those with mental ages below three - i.e. all those under three, and all politicians over the age of three -….:-)________

90% of Euro banknotes issued in Germany are never spent: they’re just hoarded!!!!________

Thinking aloud….free banking (advocated by George Selgin and others) comes to the same thing as full reserve banking, seems to me. Reason is that under free banking there is no deposit insurance, thus deposits at banks are essentially equity: so called “depositors” stand to lose their shirts just like shareholders. At the same time, under free banking, depositors who want total safety are presumably free to deposit money at state run savings banks like National Savings and Investments in the UK. And that is effectively full reserve banking: loans are funded via equity, while no risks whatever are taken with deposits that are supposed to be totally safe.________

This is a laugh. One of the biggest consumers of carbon based fuels in the world, the US Air Force, complains about climate change.________

Like many people, I'm getting increasingly tired of the censorship on Twitter. I've started moving to alternative sites like gab.ai and reddit. Obviously if the censorship gets much worse, I'll abandon Twitter altogether.________

Richard Murphy thinks he invented "Peoples' QE" (the idea that the state should print money and spend it in a recession). See last paragraph here.

Latest fashionable idea among the chattering classes is that central banks should promote environmentally friendly activities. So why not have CBs promote every other worthy cause, like education, health care, you name it? Reason is that having CBs stick their noses in sundry worthy causes is just duplication of effort. E.g. we can have any cut in CO2 emissions we want by simply imposing a sufficiently heavy tax on carbon based fuels, so why have a second lot of bureaucrats doing what an existing lot of bureaucrats can do at little extra administrative expense? Moreover, CBs are supposed to keep out of politics.

On the other hand it can well be argue that global warming is so serious that absolutely any method of cutting it is acceptable, however daft. Also there is some evidence that central banks' bond buying exercise has been skewed towards carbon based fuel producers etc. Certainly if CBs are to buy private sector bonds, the skew is not acceptable. However, buying private sector assets is silly way to impart stimulus. Reasons are in a long article coming up in a day or two. ________

According to this source, agricultural land in the UK changes hands for an average of £21,000 per hectare. Land with planning permission changes hands for £6million. Raving bonkers. I don't mind a finite markup when planning permission is granted, but that £6million is totally absurd. More land should be made available for building houses.

Actually I suspect that £6million figure is wrong: I've seen £1million and £2million cited quite often before, but not £6million. But even £1million is ridiculous.__________

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MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A